If the government fails to check the increasing amount of wandering
liquidity in the economy, its accumulation will cripple the economy
and will no longer leave space for economic activity.

One of the plagues the economy is struggling with today is a huge amount of
wandering liquidity under conditions that no productive and safe space has
been predicted to guide the cash flow. Consequently, these days, we are
witnessing accumulation of an ever-increasing amount of capital in the hands
of the people, which keeps the economy away from the path of development and
achieving long-term economic goals.

23% Jump in Liquidity in 2017/18

The Central Bank of Iran (CBI) announced the liquidity for the month of
Esfand (February-March 2018) at more than 15,290 trillion rials, up by 22.1%
compared to the corresponding period last year.
The money volume in this period was 1,946.7 trillion rials, which grew 19.4
percent from February-March of a year earlier. The quasi money in the
statistical briefs released in February-March of the previous year reached
13,353.1 trillion rials, which increased by 22.5% compared to February-March
of the previous year.
These figures indicate that the CBI has not abandoned its authority for
printing fiat money and has increased the figure of wandering cash flows by
23% over the same period a year before. The high figure indicates the CBI’s
poor performance in issuing money in the economy.

Government’s Failure to Control Liquidity

Interestingly, despite the adoption of policies such as advance sale of gold
coins and massive supply of foreign exchange at the currency markets over
the past few months, the volume of liquidity has been so high that the
government was unable to reduce the wandering cash flow in the economy.
The government, however, is partly responsible for this situation. The
government has played a major role in the growing trend of liquidity by
making huge withdrawals from the banks. This has sparked widespread
frustrations for the banks which are faced with scarcity of financial
resources.

According to the same statistics, the banks’ liabilities to the CBI was
1,320.3 trillion rials in February-March 2017/18, which increased by 19.2
percent compared to February-March 2016/17 and 32.4 percent compared to the
same period in 2015/16.

Under these conditions, if the government fails to check the increasing
amount of wandering liquidity in the economy, its accumulation will cripple
the economy and will no longer leave space for economic activity. The
government will be unable to spend its economic assets on productive
activities and will have no choice but to inject the liquidity into parallel
markets. However, if the same economic policy persists, considering the
uncertain and unproductive environment and the forthcoming sanctions, there
would remain no safe room for investment and production except for economic
frustration and a more turbulent economic environment.

It goes without saying that the track of rising prices and targeting the
livelihood of people is the biggest danger threatening the people in this
situation; right in a year that people were waiting for long strides to be
taken to eliminate poverty, we are witnessing their living condition getting
worse.

Banknotes Production Waste Causes Liquidity

Meanwhile, the member of Iran Chamber of Commerce, Industries, Mines & Trade
believes that part of the liquidity is due to the waste in banknote
production. According to Majid Reza Hariri, 15,300 trillion rials of
liquidity which is equivalent to $400 billion (based on 42,000 rials per US
dollar), is not a big figure compared to the economic expanse of our country
– an economy with more than $100 billion worth of foreign trade per year and
a high domestic trade. He claims that a portion of the liquidity relates to
the government waste based on the production of money which is done under
the title “Fiat Money Printing”.

Another part of the liquidity is related to spending from a treasury without
production backup, such as the debts of some institutions that did not pay
the people’s deposits and the government was forced to borrow from the
treasury to meet the satisfaction of the protesters. Thus, the original debt
remains and covers 14% of the liquidity.
Hariri stressed that before looking at the volume of liquidity attention
must be paid to the whys and hows. When the government proudly announces
that “we would not poke our nose into people’s business,” this liquidity too
will focus on certain individuals and special people; on the other hand, it
could also create the risk of an influx into different and uncontrollable
markets, he added.

He noted that if financial transactions of individuals are monitored, it
would prevent money laundering and tax evasion by big shots.
The vice chairman of Iran-China Joint Chamber of Commerce said: “If in the
financial system there is no space for money laundering and tax collection
systems can get taxes from incomes, they would reach a point of equilibrium
and there would be no concern for liquidity. It will also lead to economic
growth in industrial, mineral, agricultural and service sectors.”
Noting that liquidity is written and announced mostly according to bank
statements, Hariri said: “For example, a person who had 100 units of debts
last year, his debts for the current year is calculated with 26% of bank
interest and penalties. In other words, 26% of the liquidity is related to
bank debts written only in numbers but are not real.